Horizon Kinetics Special Report on Japan

[Ax6isB]

I’m not sure how accurate this lengthy report is but I found it very interesting particularly 1) why the parent child company relationship exists 2) why JP company financials are so obscure and 3) further changes being forced onto JP companies by the Tokyo Stock Exchange in the next 12 months (it appears the TOPIX will change). Sounds like some good opportunities for investors even if it just means having a better understanding of what a company is disclosing.

https://horizonkinetics.com/app/uploads ... l-v2-5.pdf

[mighty58]

Hmm. interesting read. Thanks for sharing.

So if I understand their thinking correctly, they're saying upcoming listing rule changes will force parents that own a significant majority of listed subsidiaries to either:

1. sell down their holdings, to ensure the subsidiary meets the critera to remain listed on the (to be) "Primary" section of the TSE
2. make a takeover/buyback tender offer (privatization to maintain control)
3. do nothing, whereby the subsidiary will be relegated to the (to be) "Standard" section of the TSE

One thought I had: the authors are placing a lot of emphasis on the "prestige" of being listed on the TSE Primary section as a driving force, and while I can see the benefits in the general sense, I wonder how much a parent company would really care. Taking course "c.", so long as you have at least 25% of the stock free floating to ensure continued listing, would allow the parent to just continue on as before. This might entail a few added reporting requirements, but that cost doesn't compare to what a takeover bid would require.
As for option a. it seems some parents will have no choice (like Yusei/Yucho Bank, where Yusei owns about 90%), but a whole bunch of parent companies suddenly putting a portion of their holdings on the market... wouldn't this put downwards pressure on the stock? (ie. by flooding the market with supply).

Does anyone have a list of such companies btw? I could only find this wikipedia page, which, while handy, doesn't provide the percentage the parent owns. https://ja.wikipedia.org/wiki/%E8%A6%AA ... 0%E8%A6%A7

[Ax6isB]

As for option a. it seems some parents will have no choice (like Yusei/Yucho Bank, where Yusei owns about 90%), but a whole bunch of parent companies suddenly putting a portion of their holdings on the market... wouldn't this put downwards pressure on the stock? (ie. by flooding the market with supply).

That’s an interesting observation that I hadn’t thought through. It certainly could do that and I imagine the BOJ is standing by ready with something as they make this whole process sound very methodical.

I can also see a scenario where there’s a lot of company closures and layoffs. Again, there’s probably a plan and hopefully not like the vaccine roll out.

I don’t know how accurate this report is but some aspects of it sure makes sense to me given my experience working at a Japanese company. We had some child companies that I couldn’t figure out but after reading this, eureka?

[mighty58]

That report/white paper is obviously half-thesis, half marketing doc, so some interesting ideas, but not sure how much stock to put into it as a positive driver for share valuations. They could very well be on to something, or not, ... I'm not smart enough to fully evaluate it though.

And yeah, I work at a Japanese megacorp that has 1,000+ subsidiaries, a handful of which are listed, and while they all run as proper businesses, there is definitely the corporate version of amakudari happening with many of the senior exec positions.

[fools_gold]

This is really interesting stuff. Apparently Monex Activist Fund has a similar strategy. I think they have about 25% is in parent child companies. Their holdings are in the operations report here for anybody who is interested.

[Ax6isB]

I find JP financial statements and disclosures very difficult to understand so as a potential investor, I hope that this report is true about upcoming changes regarding publicly listed companies. I feels odd to me that I’m not investing in companies that provide local jobs in Japan.

The end of the week’s news regarding Toshiba could have an accelerating effect if there’s truth to it (Toshiba allegedly colluded with METI to pressure foreign activist shareholders).

I do have concerns though as the social contract described in the report provides some wonderful stability. I guess if the path laid out is true, it means change is coming which will be probably a mix of positivity and negativity. And hopefully some investing opportunities